Should I Take Out A Fixed Rate Mortgage Or A Variable Rate Mortgage?

When buying a new house and choosing a new mortgage, you’ll need to make the decision between fixed rate and variable rate mortgages. Today, we give you the benefits and disadvantages of taking out a fixed rate mortgage or a variable rate mortgage.

Before you buy a new home and consider taking out a mortgage, there are several questions you should be asking yourself, including:

If you’ve answered all of these questions, and you’ve determined that you want to buy a home, you have determined how to get your mortgage and what the mortgage length should be, there may still be one question you haven’t yet asked yourself: should I take out a fixed rate mortgage or a variable rate mortgage?

What Is The Difference Between Fixed Rate And Variable Rate Mortgages?

The only difference between taking out a fixed and variable rate mortgage is how your interest rate is set and how it could change in the future.

A variable rate mortgage (also known as an adjustable rate mortgage), the interest rate may go up or down at any point and will usually be aligned with the government interest rate plus a certain percentage chosen by the lender. However, this can change at any time.

For a fixed rate mortgage, the interest rate is agreed between yourself and the mortgage provider when you take out the loan and it will not change for a pre-determined period. There are fixed rate mortgages which guarantee the fixed rate period for 1 year, 2 years, 3, 5 or 10 year periods.

Generally, the longer the fixed rate period, the higher the interest rate will be.

After the fixed rate period, the mortgage will return to the lender’s variable interest rate.

Consistency of monthly payments: with a fixed rate loan you can predict your exact mortgage payments every single month during the fixed rate mortgage. This makes budgeting and cash flow management a much easier task.

Best for long term loan payments: new homeowners who expects interests rates will go up and would want to lock in a lower interest rates now will want to take out a fixed rate loan.

Protection from interest rate hikes: equally, the economy does sometimes (every few decades) see some big spikes based on certain national and international events and a fixed rate loan can help protect against this. This is specifically useful in a low interest rate environment or in any countries with political or military instability.

What Are The Disadvantages Of Taking Out A Fixed Rate Mortgages?

Whilst there are some clear advantages to fixed rate mortgages, they also have certain downsides when compared to variable rate mortgages, including:

Monthly payments are higher than variable rates: generally, fixed rate mortgages are set at a interest rate higher than the variable rate equivalent. This is because you have to essentially pay the bank to protect against the potential increases in future exchange rates.

You’re stuck when interest rates fall: Homeowners cannot take advantage of any interest rate decreases that might occur during the life of the loan. I personally learned this the high way when interest rates in the UK tumbled in 2008-9. I signed a 3 year fixed deal in July 2008 at 7% interest rate (when Libor was at around 5%). 9 months later in March 2009, the standard variable rate had fallen to 2.5% and Libor was at a minute 0.5%. This meant that I was paying three times more than many of my friends and colleagues in interest

Early repayment charges: Usually, fixed rate mortgages come with a condition whereby you cannot overpay on your mortgage, or change your mortgage product, without incurring a significant fee (usually between 2-5%) which can run into £1000s. This happens both when there is transfer of home ownership due to sale or refinancing over to another lender.

Should I Take Out A Fixed Rate Mortgages Or A Variable Rate Mortgage?

It’s up to you if you take out a fixed rate mortgage or a variable rate mortgage.

If you are someone who likes to know exactly what you are signing up to, then a fixed rate mortgage over a long fixed period may be right for you. However, just beware that you are locking yourself into that rate come rain or shine, and it could cost you a chunk of cash if you ever want to get out.

What would I personally do? Well, in the low interest rate environment there is a lot of advice recommending fixed rate mortgages because interest rates can only go one way.

However, it’s vital to remember that mortgage lenders have already factored this into their interest rates that they offer.

I personally favour the freedom and flexibility that comes with taking out a variable rate mortgage, but there is truly no right or wrong answer in this debate – whichever makes you feel more comfortable.

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Lovely comments

I who finances a home with an ARM should understand all the possible outcomes for the mortgage, but I know there are many homeowners who do not understand their ARM contract. Fixed-rate mortgages do not have the complexity of ARMs.